Budgeting Tips: Capital Expenses vs Operating Expenses

Chad CoderHealthcare IT

As we hit 2020 running, healthcare organizations nationwide are trying to maximize their reimbursements, optimize their technology, stay ahead of the labor shortage, and minimize security vulnerabilities. Healthcare organizations have a lot on their plates in 2020 – a lot. 

Depending on your fiscal year, you may have just wrapped up budgeting season, or you may be looking it in the eye. No matter where you stand, there are some budgeting best practices for healthcare organizations that have emerged over time as security, technology, and clinical workflow has changed. 

Starting with types of expenses, there are two main expense types in your budget:

Capital Expenditures – large, pre-paid expenses that depreciate over time. Among others, buildings, technology infrastructure, land, equipment, and new medical devices are classified as capital expenditures for healthcare practices. Capital expenses are typically significant purchases that a healthcare practice makes as an investment in their future. As these capital assets grow older, their value depreciates, which shows up as an expense on a practice’s balance sheet. 

Operating Expenditures – conversely, operating expenses are typically used for day-to-day expenses like rent, insurance, utilities, and other consumption-based assets. Operating expenses are typically preferred by finance professionals because of their predictability and minimal impact on cash flow. 

As healthcare has evolved over the years, some traditional capital expenses are now becoming operating expenses in practice budgets. Specifically, as it relates to information technology. 

Software-as-a-Service (SaaS) is a great example of this revolution. Twenty years ago, healthcare organizations would pay tens or sometimes hundreds of thousands of dollars up-front for a software solution, only to pay additional payments as the software aged for updates, security patches, and new technology. Now, many EHRs and other business process software are SaaS-based, where practices pay monthly based on the number of users accessing the software. 

Cloud computing is another example. In the past, practices would invest large capital into new infrastructure and networking equipment. After 3-5 years, the equipment became obsolete as technology continued to evolve. The cycle of investing large amounts of capital into new infrastructure continued. Cloud computing disrupted the whole infrastructure model. Now, practices are able to migrate their IT systems to a cloud-based platform. There is no longer a need for practices to dump thousands of dollars into infrastructure every few years. The Cloud allows for budgetable, predictable operating expenses based on usage – just like you pay for your utilities. 

This year, we challenge you to look at your expenses and investments differently. Ask the right questions and drill down past just the line item into the overall impact that your budgeting decisions have on your organization as a whole. 

Do the research to see what makes the most sense for your practice. Ask these questions when evaluating line items within your budget:

1. What is the opportunity cost of this large capital expense? 

2. Are you unable to move forward with a different initiative because of it?

3. Can you convert some of your large, capital expenses into operating expenses? 

4. What impact will this have on your practice? 

5. Will the minimization of capital expenses help the practice appear more financially attractive for a potential acquisition strategy?

6. Will you be able to invest in a new, innovative capital investment by converting another capital investment into an operating expense? 

7. Can this budget redirection have a positive impact on patient care? 

Answering these questions and presenting your budget in a strategic, proactive way will allow your practice to make decisions for the long-term, rather than patching areas for a short-term fix. 

For more information on how cloud computing can help turn your large, capital investment into infrastructure into a predictable, usage-based monthly fee, contact us at https://netgaincloud.com/contact/.